Britain has developed an astonishing culture of public self-harm. Almost every politician or commentator wants to earn their credentials as economically literate by outdoing each other in calling for Britain to cut its £175bn budget deficit and as soon and by as much as possible. On all sides they say there must be honesty with voters about the swingeing pain ahead. The case is obvious.

There seems almost complete ignorance that the 22 April Budget already committed the government to halving the budget deficit in the four years from 2010/11 through a mixture of a radically reduced rate of public spending growth and tax increases. But when Alistair Darling repeated the commitment in Cardiff last week in a good speech, making the case for government activism and investment – and again in his Observer article today – he is hailed as a conquering hero and tribune of honesty.

He has won the argument with Gordon Brown over Labour's strategy, it is confidently asserted, so demonstrating his new autonomy having survived Brown's attempted sacking. No longer is the choice between Tory cuts and Labour investment, as Brown wanted. Now it is to be between the nice and nasty cutters, despite the fact that the trajectory of falling borrowing is exactly the same as it was five months ago. These new economic literates plainly do not read the Budget background papers.

Meanwhile, David Cameron and George Osborne, who had been developing an interesting argument, if with little flesh, for a high-investment, moral, environmentally sustainable capitalism, have decided that the national debt peaking at some 80% of GDP constitutes a national emergency. Never mind that since 1750 the national debt has always been proportionally higher than this, except for two 40-year periods – one at the end of the 19th century and the other from the 1970s until now.

From 1750 to 1870, Britain won wars, assembled an astonishing navy, built an empire and launched the Industrial Revolution to become the envy of Europe, yet the national debt was consistently above 80% of GDP. Nobody cared. High national debt was a precondition for winning two world wars in the 20th century. Periods when the over-riding preoccupation has been lowering the national debt have coincided with industrial, economic and strategic decline. So it will again.

Nor does it seem to count for anything that the "runaway" increase in public spending and borrowing has been a central plank in avoiding a slump. The Conservative party has a sacred duty to restore discipline and order against the free-wheeling socialist spendthrifts. Thus David Cameron is "taking a lead" with a populist attack on reducing the pay, perks and numbers of MPs. He remarked ruefully that it was a pinprick beside the enormous scale of what has to be done, but even democracy must share in the pain. Later, 20 Conservative councils were paraded as exemplary cost-cutters.

Nobody is for waste. There are complex reasons why so much of central government is poorly managed and that's not just to do with strong trade unions. Dealing with it requires wholesale cultural and even structural change, which won't be helped by using the language of a jihad against the state. The public sector workers need to be made into allies; instead, they must by now fear for their job and pensions, caught in a political discourse in which public activity is the same as being a leech. It is not clever.

Yes, Britain entered the recession with borrowing that was too high. Brown had fallen for his own over-optimistic rhetoric. Nor can borrowing now remain at £175bn. But it won't. Darling will tighten the purse strings, even as Brown shrank from doing so. Public borrowing will peak. It will then halve over four years. Then the national debt will be more than manageable. The rating agency Moodys confirmed last week that the triple A status on our debt remains.

So let's have an "honest" debate. First, there should be recognition of the breathtaking success of the most aggressively Keynesian economic stance taken since the war and how the state has been forced to come to the aid of a feckless private sector in order to relieve the prospect of mass unemployment and business collapse. The intellectual and practical lesson is that there is a profound relationship between the public and private. The private sector does not organise itself optimally in markets; it needs constant monitoring, regulating and stimulating.

The architecture in which it operates, employs and innovates has to be consciously designed or it will be dysfunctional. The state is the system designer, collective investor and risk manager and taxation is its due deserts and enables it to discharge its function. Rolling it back mindlessly comes from the same economic mindset that gave us the credit boom and subsequent collapse.

The debate should not be how much self-harm we can inflict on ourselves, but how to build on the lessons learnt from the crisis and create a high-investment, fair capitalism, a cause that the Tory high command has now semi-abandoned. In the same way Keynesianism works at a high level, so it works at micro level. The allegedly self-organising market is delivering far too low a level of business start-ups and far too few of these firms survive to become fully-fledged, medium-sized enterprises, a crisis made worse by the collapse of credit.

Too much entrepreneurship in Britain comes from the same school as the four MG Rover directors, who directed tens of millions into their own pockets, or those traders earning absurd bonuses for being micro-seconds ahead in some socially useless trading.

Yet the scientific and technological opportunities are growing exponentially. Labour has helped the scientific community so that we are only just behind our competitor nations in innovation. What we should now be discussing as a country is how to build on this and develop it into a system fostering productive – rather than Arthur Daley-style – entrepreneurs.

On top, we need a world class-infrastructure – from a high-speed rail network to great schools and universities. Then there should be a discussion about better enabling and equipping ordinary people to build their careers and lives and how better to manage risk by offering a new deal on insuring their incomes, their mortgages and offering new resources for training over their working lives.

All this costs money, but fortunately Britain can sell its debt easily. We should be measured about cutting the deficit, certainly no faster or sooner than Darling plans. Nothing should stand in the way of a determined effort to build a high-innovation, high-skill economy. Investors will find this more reassuring than the self-harm of swingeing budget cuts and will care no more about whether the national debt is 100, 80 or 60% of GDP than our forebears did when they used it to build British industrial and military pre-eminence. David Cameron please take note.